On April 24 Canon reported its financial results for the first quarter of 2019. Unable to maintain the profit results momentum from the 4Q and YTD 2018 financial report, Canon posted double-digit declines in sales revenue, gross profit, and operating profit. Compared to 1Q 2018, first quarter 2019 results were:
| 1Q FY2019 | 1Q FY2018 | % delta 2019 v 2018 | |
| Sales Revenue | $7.79B | $8.65B | -10.0% |
| Gross Profit | $3.52B | $4.01B | -12.2% |
| Operating Profit | $364M | $695M | -47.6% |
Canon pointed out that, although the U.S. economy stayed strong in the first quarter, sluggish capital investments in China, declining exports producing a bearish manufacturing sector in Europe, economic slowdowns in emerging markets such as Southeast Asia, and continued trade friction in the global economy contributed to these financial results.
On a positive note, Canon was able to reduce SG&A and R&D expenses by 4.8% (from $3.3B in 1Q 2018 to $3.1B during 1Q 2019). However, the ratio of these expenses rose to 40% of sales in 1Q 2019 compared to 38% of sales during 1Q 2018 due to the overall sales revenue decline.
In the first two slides of their presentation deck, Canon noted the investments and progress they have made in transforming their business portfolio to offset the effects of market maturity in their core businesses. This included acquiring industrial equipment companies beginning in 2005, adding commercial printing, network cameras, and medical equipment and forming four new businesses around these. They remarked that in 2015 these new businesses contributed only 9% of the company’s overall sales. For 2018 that has increased to 25%. With these transformations, Canon feels that the company “has changed itself from a traditional camera and office equipment-oriented company to one that now has new business spheres.”
Office
Although the Office business unit’s 1Q 2019 sales revenue declined 3.9% when compared to 1Q 2018 (from $3.9B during 1Q 2018 to $3.8B in 1Q 2019), Canon said it grew unit sales of MFDs. Canon cited the continued trend of shifting from monochrome to color devices, good unit sales of the newly introduced imageRUNNER ADVANCE Gen3 2nd edition series, new color production print models, and strong sales for new color laser printer models as reasons for this increase in unit sales.
Economic slowdowns in emerging markets along with lower sales and profits in consumable sales, particularly in Europe, were noted as major contributors to the lower revenue and profit results. However, two regions did see increases in office business sales revenue: Japan saw a 6.3% increase and the Americas experienced a 0.2% rise over 1Q 2018. Unfortunately, Europe and the Asia/Oceania regions saw Office business revenue drops of 13.1% and 6.8% respectively.
Looking forward, Canon stated that in MFDs they expect the overall market to remain firm and that they will work to “realize unit sales growth that continues to exceed the overall market.”. They went on to say they will introduce four new medium-speed laser printer models from the second quarter on and continue to penetrate the digital commercial print market, which has shown a growth rate of approximately 5%. In addition, they will be more aggressive in pursuing vendors in the aftermarket that infringe upon Canon IP.
Imaging Systems
Going from $1.9B in 1Q 2018 to $1.6B in 1Q 2019, sales revenue in the Imaging System business unit, which includes cameras as well as inkjet printers, declined 17%. Even more severe was the decline in profits for the 1Q 2019. Imaging System operating profit suffered an 82% drop from 1Q 2018 operating profit – from $232M to $42M.
Inkjet printers, as part of the Imaging System business unit, saw an expansion of the refillable ink tank models. Canon said they will work to accelerate these sales, especially in emerging markets. The A3 MFD inkjet models announced in the fourth quarter of 2018 are already being marketed in Japan and Canon expects to “fully deploy” them into other markets going forward.
Cash flow
Canon stated that cash flow was affected by growing inventory and lengthening inventory turn rates. At the end of March 2019, the inventory turn rate was at 62 days, 10 days longer than the same time period of 2018. High digital camera inventory due to sales slowdowns, as well as increased Medical inventory to prepare for sales expansion, were cited as the reasons for this increase. However, all business units showed higher days of inventory.
Given these circumstances, Canon lowered net income projections by 40B yen ($360M). This affected cash flow and at the end of March 2019 cash on hand and equivalents were $3.97B compared to $4.7B at the end of December 2018.
Outlook
Canon’s outlook is that their situation will remain “challenging” due to the overall global economy and its slowdown along with market changes. This was illustrated in their downward adjustments to their initial FY2019 outlook. Total Revenue outlook has been reduced by almost $500M, a 1.3% change from the initial forecast and a 2.6% decline from FY2018 actuals. Canon now forecasts that operating profit will be 16% less than initial projections and 20% lower than FY2018 actuals. To meet these challenges Canon expects to achieve benefits from new product introductions from the second quarter onward and their focus on raising the sales contributions of the new businesses. Toshizo Tanaka, Executive VP & CFO of Canon, and who presented the first quarter results, said, “We will strive to ensure that our performance in the first quarter was the bottom, realize sales and profit growth in the second half, and link this to a real recovery in our performance from next year on.”
Our take
With these types of first-quarter results, it seems Canon has quickly accepted that 2019 will need to be a year of refocusing, redefinition of core businesses and expansion efforts of new businesses. FY2019 has not been written off but financial performance challenges for the rest of the year are real and will remain. Canon’s statement that they will work to ensure that this first quarter performance is the “bottom” and that they will work to realize sales and profit growth in the second half with real recovery of financial performance “from next year on” appears to support that thought.
Canon’s core business units of Office and Imaging Systems are under tremendous competitive and market change pressure. Threats from competitive market forces and new technologies are being introduced on a regular basis as replacements for traditional printing and image capture.
With decreasing demand in home and home office inkjet demand/use for products such as Pixma and Maxify inkjet printers, how will Canon take advantage of the growing use of inkjet in the enterprise office market? The unusual positioning of the new A3 inkjet products through a “consumer” sales channel may not be the best path to that market.
The Office business unit will continue to be the cash cow for Canon even as the print (office and production) market continues in its maturity and commoditization. This business unit contributed 46% of sales revenue and 72% of operating profit in the first quarter of 2018. The shift from mono devices to higher revenue and better profit color devices continues. It is important to note that aftermarket revenue and profit annuities will continue to be under pressure from market forces that not only reduce total page volumes printed, but also from aftermarket third-party suppliers of supplies and parts. This will encroach on the ongoing annuity stream that Canon relies on, making it more difficult to find revenue and profit growth both in the near term and future.
The digital commercial print, medical and network camera imaging areas are showing signs of what could be the future Canon. The results in commercial printing – especially in digital packaging and graphic arts printing – must be heartening to Canon. The Océ acquisition will continue to pay dividends in this area. The Medical Systems business unit is the only unit Canon expects to see revenue and profit growth in FY2019. Canon is rightly optimistic in this area as the market for advanced medical imaging technology continues to show demand. We agree that creating an effective and efficient sales organization to grow this opportunity for the company should be a primary focus and investment for Canon. Finally, the network camera market is providing organic market growth of more than 10% enabling Canon to continue double-digit growth in this new business area.
In our last financial review of the 4Q and YTD 2018 financial results we stated that “it is highly possible and perhaps planned by Canon that at the current growth rate of these new businesses areas (commercial printing, network cameras, and medical equipment) that within the next 5 to 7 years Canon may easily be known … for much different technologies and products (other than cameras and copiers).” We continue to hold to this view and see from this quarter’s financial reports Canon corroborating that interpretation perhaps pivoting even faster to these new businesses. Canon is going to be faced with difficult decisions in its core business units. The strategic decisions they make during the rest of FY2019 will show the commitment Canon has to move successful financial performance reliance away from the traditional core businesses and into the new businesses they’ve defined.
